Deutsche Bank (DE:DBKGn) hit fresh new lows this week on the fear that Germany will not be able to bail out the bank. DBK appears to be headed for bankruptcy, which would wreak havoc thanks to the fallout from the bank's complicated derivatives holdings.
Indeed, DBK's outstanding derivatives exposure is 20x Germany's GDP and 5x greater than the Eurozone's.
Amidst the chaos, DBK's head of currencies trading and emerging-markets debt trading, Ahmet Arinc, has left the company, which is the most recent negative news to hit the bank. Traders slammed the stock by more than 6% on the news.
Another European bank that might require a bailout is the Italian lender Banca Monte dei Paschi di Siena SpA (MI:BMPS), which is the world's oldest bank. The European Central Bank warned that BMPS is holding dangerously high levels of bad debt.
And while Italy wants a bailout for Monte Paschi, the Germans oppose any such move. Wolfgang Schaeuble, the German Finance Minister, stated in a news conference in Berlin that Italy intends to stick to the banking-union rules, as was conveyed to him by his Italian counterpart, Pier Carlo Padoan.
Italian PM Hits Back
Shortly thereafter, Italian Prime Minister Matteo Renzi said that “the difficulties facing Italian banks over their bad loans are miniscule by comparison with the problems some European banks face over their derivatives”. In a reference to Deutsche Bank, Renzi said there were other European banks with much bigger problems than Monte Paschi.
"If this non-performing loan problem is worth one, the question of ‘derivatives’ at other banks, at big banks, is worth one hundred. “This is the ratio: one to one hundred," Renzi said.
More Troubles Ahead For DBK
According to analysts at Societe Generale (PA:SOGN), DBK is likely to lose its place on the Stoxx 50, which will spawn selling pressure as index funds scramble to reposition themselves. And that will likely lead to a fresh round of selling. According to a statement by the IMF, DBK is now the most dangerous bank in the world.
Gold Is Key
Bond king Jeff Gundlach stated that “things are shaky and feeling dangerous”. Regarding the European banking crisis, the Double Line bond king said that “Banks are dying and policymakers don’t know what to do. Watch Deutsche Bank shares go to single digits and people will start to panic… you’ll see someone say, ‘Someone is going to have to do something’.”
Gundlach told Reuters that “gold remains the best investment amid fears of instability in the European Union and prolonged global stagnation, as well as concerns over the effectiveness of central bank policies”.
Conclusion
Wall Street's that Germany will not allow DBK to fail is fading. Post Brexit, tensions are running high among the remaining members, as seen in the spat between Germany and Italy. Due to Germany's initial stance, it is likely that any move to bailout DBK will face considerable resistance from all of the member nations. If allowed to fail, DBK will cause a ‘crisis’ many times greater than did Lehman Brothers.
Americans need to pay attention to this European Financial Crisis because it's contagious and could easily spread.
Author does not currently have any position in Deutsche Bank at this time.